Digital Ally (DGLY): Why This Stock Will Get Chopped

Shares in unprofitable Digital Ally have rocketed following last week's shooting rampage that left five police officers dead and more fighting for their lives.

As the gunman blasted away and the crowd panicked, police body cameras supplied by Taser International (TASR) captured video of the scene. With the nation focused on Dallas and previous shootings, it's not too surprising that Taser shares soared 5.9% to $27.30.

Flying in under Taser's wings, DGLY surged from ~$4 to $7, bumped along and then topped out July 13 at $6.23 per share. This morning, the stock opened at $5.49 as people begin to realize Digital Ally is a poor copycat focused on an antiquated product.

Now TheStreetSweeper expects the stock to plummet back to earth for the following reasons:

*1. No Comparison: Taser Owns The Market

The company's nemesis Taser International initially gained attention with its stun guns. But now the company has catapulted into the market-leading position for body cameras, controlling three-fourths of the body camera business in the United States.

Taser's Evidence.com allows police to log on and manage their body camera video.

Meanwhile, Digital Ally is focusing on a different product. Though the Kansas company began in 2003 as a bow-hunting product company, in 2006, it began shipping what is still its primary product - the old-time, in-car video camera. These DVMs or digital video mirrors make up the vast majority of company sales at 43%.

Taser sales have exploded - revenue jumped 20% last year to $197.9 million ... But Digital Ally sometimes has to discount products to get them out the door. Both companies' sales suffered somewhat last quarter compared with the previous quarter. But Digital Ally financials can't even compare with Taser.

This isn't to suggest Taser is perfect. Far from it. The company has come under fire in connection with competitive bidding questions and financial ties to police chiefs. The company's 58 price to earnings ratio shows it's grossly overvalued. But at least it does rack up nearly 10 times Digital Ally's revenues... and positive earnings.

Still, it's ridiculous for Digital Ally to get an undeserved, out-sized stock boost thanks to Taser and average investors' misunderstanding of Digital's business.

*5. Yawning: Institutions

Finally, investors can usually find at least a little comfort in the company they've invested in if a lot of big banks own it, too.

Sure, Digital Ally's stock price has gone nuts. But its business can't support that price ... not with net losses, downward revenue trend, burning ~$1 million per quarter, little interest in its sub-standard body cam product and eroding main product.

Digital Ally is an 8-inch black-and-white TV flickering on and off in Lenexa, Kansas while the world stands in awe before a 100-inch plasma TV.

Here's the deal: Mini-me companies like this - with virtually no institutional ownership, horrible fundamentals and old, sub-par products - may go crazy under the limelight. But when the light dims next week, retail investors rush out the door. And the stock gets chopped in half.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in DGLY and stand to profit on any future declines in the stock price.

Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.